Adam Smith's Lost Legacy

Tuesday, May 31, 2016

QUICK BITS NO 8

And why economists have come to have second thoughts about Homo economicus.“The year before Adam Smith wrote in his Wealth of Nations (1776) about how the self-interest of the butcher, the brewer, and the baker would put our dinner on the table, James Boswell’s Dr. Johnson gave Homo economicus a different endorsement: “There are few ways in which a man can be more innocently employed than in getting money.”

Adam Smith showed how a constitution for knaves might actually work at least as far as the economy is concerned. The economic actor, he wrote “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

This is hardly making the case for laissez faire that later generations have attributed to Smith. But it is a milestone in the emerging view that motives other than self-interest could be pernicious. The sentence following one of Smith’s rare references to the invisible hand makes this point: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

Comment

Adam Smith knew nothing of the ideas of Homo economics, a wholly near-modern idea - still dubious for all that. Moreover, “the butcher, the brewer and the baker” don’t put our dinner on the table without their customers exercising their own acts in pursuit of their self-interest by agreeing the price for their dinners that incentivises the sellers to go town to the trouble of preparing the ingredients for their customers’ dinners. It is a bilateral transaction.

Smith called it bargaining. See Smith’s Wealth of Nations, Book 1, chapter 2, pages 26-7.

Incidently, Smith never used the words ‘laissez-faire’, which was a wholly one-sided idea presented by French merchants operating in regulated local markets to allow them freedoms, not to share those freedoms with their customers or their employees. In the 19th century UK mill owners argued for laissez-faire for themselves, not their labourers in the disputes over the length of the working day, set arbitrarily by the employers. Likewise with the employers’ campaign to abolish to UK’s Corn Laws so that the price of bread would fall and they could cut wages.

Smith’s rare use of the metaphor or ‘an invisible hand’ was not about a general rule that the “pursuit of his self interest” frequently “promotes that of the society more effectually than when he really intends to promote it.”. It was about a specific case of a merchant, not a general rule, who preferred to invest in the home economy because he consiiderd that investing abroad was too riskly. By investing locally he felt more secure.

While the outcome of his action was that he added his capital to local economic activity and this was a public benefit. However, the same merchant, like others, could agitate for tariffs on foreign imports - even outright prohibitions - which actions raised domestic prices and merchants’ profits because competition was reduced. Such outcomes are public disbenefits.

Friday, May 27, 2016

LOONY TUNES NO 135

1

In a “sponsored article written by the author. euobserver has no role in the creation of its content”, HERE which reads like a news release from Xinhua China’s official international propaganda agency.

“Perceptions over South China Sea dispute are simply wrong.”

“Increasingly more Chinese people believe that the U.S. is no longer just an invisible hand behind the rising tension in the South China Sea. They are afraid that the deployments by the U.S., if not curbed, can only result in militarising the region.”

“Manohar Parrikar also made big revelations in the AgustaWestland case. He said that an invisible hand behind the kickbacks in AgustaWestland deal.”

Comment

He then revealed THE “Names”! What was “invisible” then?

4

Bill Clemens, a resident of Peublo West, posts (26 May) a letter to The Peublo West Review HERE

“The “invisible hand” is a metaphor used by early-day economist Adam Smith in his book, The Wealth Of Nations, to describe unintended social benefits resulting from individual actions. In Pueblo West, “invisible hand” describes intended social consequences resulting from clandestine actions.

The sale of every parcel of metro-district-owned real estate has been arranged in closed-door, secret executive committee meetings of metro board members and staff, plus publicly-unidentified others – collectively the “invisible hand” – very little of it ever mentioned in public meetings. Sales are then approved in public meetings by metro-board-vote on resolutions that reveal very little, scarcely ever the sales prices”

Comment

Note the certainty with which Bill Clemens claims to know of Adam Smith’s use of the metaphor of “an invisible hand”. Yet he gets it absolutely wrong; Smith wrote no such thing about “clandestine actions”.

He also knows who attended the “closed-door, secret executive committee meetings of metro board members and staff”, though there were also some “publicly-unidentified others – collectively the “invisible hand” in attendance . Note: they were not quite so invisible then and it had absolutely nothing to with Adam Smith’s use of the metaphor. Bill seeks to give authority to his gripe.

Wednesday, May 25, 2016

QUICK BITS no. 7

Bienvenido S. Oplas, Jr., head of Minimal Government Thinkers, a SEANET Fellow and member of the Economic Freedom Network (EFN) Asia, posts (24 May) in Business World Online HERE

“Political labels sometimes tend to create more confusion instead of clarifying things on philosophy and ideology. One reason for this is that certain advocates and campaigners of particular philosophies are themselves confused of what they are talking about, and yet they project to be the leaders and articulators of those political philosophies. …

… Classical liberalism was articulated and developed some 2-3 centuries ago, based from the writings of John Locke (“social contract” theory), Adam Smith (“invisible hand of the market”), David Ricardo (theory of comparative advantage), among others.”

Comment

After the lecture in paragraph one, we get a clear example of the author being “confused of what they are talking about” in paragraph 2.

There is no actual “invisible hand’ in the market. It was a metaphor used by Adam Smith to describe the conequence of the motivated action by a merchant who chose intentionally to invest his capital domestically to protect it from the added perceived risks of investing it abroad.

In addition to the intentional consequences of the merchant’s motivated actions, noted by Adam Smith, there could also be unintentional consequences, in this case, that the merchant’s capital added to “domestic revenue and employment”, which was a benefit to the public good.

Smith, metaphorically, decribed the motivated actions of the merchant, as “an invisible hand” leading in this case to a public benefit.

It was not evidence of the actual existence of “an invisible hand”, not least because the motivated actions of merchants could also lead to public disbenefits, such as when merchants were motivated to persuade governments to impose tariffs on imports - even prohibitions - which would be anti-competive by raising prices.

There is no “invisible hand” of the market. It is a myth created in the 1940s-60s by the likes of Paul Samuelson and others. Such a myth had nothing to do with Adam Smith’s clear case and only example of the ‘invisible hand” in his Wealth of Nations in Book IV, chapter 2, paragraphs 1-11, pp 452-56.

Tuesday, May 24, 2016

QUICK BITS no. 6

“Just as Adam Smith's "invisible hand" means an automatic equilibrium-inducing market clearance for producers, for investors the equivalent involves psychological forces bred by the likes of attraction-inducements as well: whatever they are that make one playground (country) tip the others to reel any deal. Intangible forces (such as security, strikes, or many kinds of market failures) must be as controllable and predictable as tangible counterparts (specific demand, supply, government policy, or borrowing rate), making investment more uncertain than production, a reality Bangladesh must pragmatically tackle.”

…Critical to the success of all of them, though, remains the "net," rather than project-specific effect of investment's "invisible" hand: infrastructure-building and energy uplift occupy the fast-lane, bank borrowings and FDI flows hold the middle-lane, and both government-related policy reforms and a security-umbrella remain on the slow-lane.

CommentTypical advice from people in a business selling expensive advice to overcome actvity in markets, despite the obligatory belief in a so-called ‘invisible hand’ that automatically adjusts everything to an equilibrium and a nod to Adam Smith, who never claimed anything about invisible hands falsely credited to him.

Monday, May 23, 2016

QUICK BITS NO 5

“The classical (including the neo classical) school of thought was led by the father of economics himself, Adam Smith (1723-1790). Their argument can simply be summarized thus: In time of crisis, there is an invisible hand, a sort of inbuilt self-regulating mechanism that would stabilize the economy to bring everything to an equilibrium level. To demonstrate this, if demand goes up, prices are bound to go up in the short run. Because prices are up, producers are going to produce more which will in turn bring prices down as the rising demand is met. All these economic activities are regulated by the market because people who are assumed to be rational, will always act in their best interest. The proponents of this view, therefore, advised government not to intervene as doing so is bound to distort the economy. One of the writers emphatically states that “it is not out of the magnanimity of the baker that we have our bread, nor the generosity of the butcher that we have our meat, but out of their self-interest”. It therefore, follows that altruism is not a virtue and selfishness is not necessarily a vice in the world of classical economists.”

Comment

The above is almost beyond taking seriously. Smith used the “invisible hand” as a metaphor, for the motivation that leads a person to an action for an intended end, and in doing so that motivated action may have unintended consequences that may be benign or malign, depending on the circumstances.

The “metaphor” was not a “self-regulating mechanism that stabilizes the economy”. Also, people are not all “rational”; it is an unsafe assumption that they “will always act in their best interests” or that everybody’s best interest are a reliable guide to how to act. Each person, wrote Smith, does not act like a chess piece on a chess board; each person has a principle of motion of his own.

“Trickle-down economics may work in textbook economic theory with ivory-tower assumptions about perfectly rational people and perfectly efficient markets. But in the real world of politics and interests, it simply provides a cover story for rentier economics. It dresses up anti-market behavior in free-market rhetoric.”

Comment

Make time to download Eric Beinhocker's article and read it.

Another dig at modern standard economics as it is taught today involving “perfectly rational people amd perfectly efficient markets” and a host of advanced mathematics. If medicine was taught and practised this way, who would be safe?

JOHANNESBURG, May 20 (Xinhua) — The United States, in a really genuine sense, has been a invisible palm behind a rising tragedy in a South China Sea, a obvious South African commentator pronounced in a explanation published in The Star journal on Friday.

Comment

“Invisible Palm”? If the hand is invisible, so it the palm - and vice versa.

Saturday, May 21, 2016

It starts, as so much does, with Adam Smith. Smith’s best-known contribution to economic thought is the “invisible hand” metaphor: socially-desirable outcomes could be achieved not by conscious, collective effort, but by the pursuit of individual self-interest. You don’t need a central planner to identify and enforce who should do what and who should get what: the public interest would be achieved as an unintended by-product of unco-ordinated individual decisions, “as if by an invisible hand.”

COMMENT

Smith’s observation in which he used the metaphor of “an invisible hand” has nothing to with “ Pareto’s First Welfare Theorem”. He simply opined the view that a merchant who was reluctant to invest his capital abroad faced avoidable risks to his capital while it was out of his immediate control and sight. Instead, he could take the available option and invest it locally. In so doing his motivation was an action that was less risky than sending it abroad.

Now that intended motivated action also had an unintended consequence in that his action added his capital to “domestic revenue and employment”. This was an unintended benefit to the domestic economy and those in it. The “invisible hand metaphor” did not describe the unintended consequence; it described the motivated intended action (without the motivate intended action there would be no unintended consequence) that caused the unintended consequence.

The distinction is important: Motivation (usually invisible to others) causes the Action that Causes the unintended consequence (which unintended consequence may be benign or malign). Asserting that an invisible hand, distinct from the motivated action causes the unintended consequence is to assert that some mystical force in economics, separate from the motivated action, causes the unintended consequence is to descend to mysticism.

Competition is Adam Smith was a process occuring in real time separating the motivated actions of real people. Modern competition theory describes the eventual outomes of Smithian competetion and this applies to modern theories of the outcomes of competition, including the Welfare Theorems of, and following, Pareto.

The mathematisation of modern economics has further clouded the different meanings of economics as a Smithian process versus those of post-Pareto descriptions of end-states. Mark Blaug (Economic Theory in Retrospect) wrote of the differences between Smith and Pareto, and I had the privilege of discussing these differences with Mark some years back during a seminar we both attended.

Stephen Gordon may benefit from reading Mark Blaug’s book and journal articles and realising there is a distinction between the two approaches.

ABSOLUTE NONSENSE ABOUT ADAM SMITH

Petitioner: “Keep Adam Smith on the £20 note as he is the face of modern day Economics”.

As a student of economics, I have found out that if it wasn't for Adam Smith and his assumptions, all noted in his famous book the 'Wealth of Nations', everything we experience today wouldn't exist. It's all down to this one man. If anything, he deserves to continue serving the £20 note.

Economics is more than just a school or university subject. Not only is it regarded as a 'social science', it can also be classed as 'a way of life'. If it wasn't for Adam Smith, the technology we have today simply would be non-existent. "The invisible hand is a term used by Adam Smith to describe the unintended social benefits of individual actions" - Wikipedia. The way the free market can operate in the UK today is all thanks to that one man, Adam Smith.

COMMENT

Much as I would agree with the petitioner about the decision to drop Adam Smith from the face of the £20 note, the arguments put forward in support of this petition are absolutely, ignorant nonsense. (No, I am not exagerating!).

“If it wasn't for Adam Smith, the technology we have today simply would be non-existent”.

Absolute Nonsense! The technology we have was invented/innovated by people independent of the fact that Adam Smith was born in 1723 and died in 1790.

"The invisible hand is a term used by Adam Smith to describe the unintended social benefits of individual actions" - Wikipedia.

More nonsense! Anyway Wikipedia is notoriously unreliable. For Adam Smith, the ‘invisible hand’ was a well known metaphor, used widely in the 17th and 18th centuries by theologians and local preachers in kirks (Scotland) and churches (England), for the ‘hand of God” and also regularly in novels, plays (Shakespeare) and even politics. The metaphor was NOT ‘coined’ by Adam Smith. Nor did he use it to describe “the unintended social benefits of individual actions”.

It described how individual motivated actions could - not would! - have unintended consequences, which may be beneficial or detrimental to others. ‘Merchants and Manufacturers” were not always, nor even mainly, benign. They would be and often were intentionally malign in their actions, conspiring against the consumer’s interests.

“The way the free market can operate in the UK today is all thanks to that one man, Adam Smith”

Beyond belief nonsense! The Petitioner is a fantasist! If Adam Smith had died young - he was a sickly child - the world would have continued along much the same tracks. The entrepreneurs who lived before, during and after Smith’s lifetime would have continued on the same innovative tracks, as would the existing politicians in governments (most of whom ignored Smith or never heard of him) in their Mercantile across Europe and North America (and elsewhere). The century in which he lived was peopled by many who had never heard of Adam Smith, nor opened his two books where he described the history (not the future!) of what was happening - as is still true today (including, apparently on the evidence of the Petition, the hapless Petitioner too!).

Most academics, let alone the general public, have not read his books (nor did they in the 18th-19th centuries. If they know of Adam Smith today they are more likely to be influenced by broad media sources which have picked up his use of a misattributed metaphor, the ‘invisible hand”, which was not mentioned by any of Smith’s colleagues while he was alive. Nor by all of later major political economists, who wrote many volumes discussing political economy in the 19th century, until a few (6) individuals in the 1870s, and after that practically nobody until the 1940s (Paul Samuelson - who quoted Smith incorrrectly).

One leading economist (and ‘expert’) admitted a year or so ago that he had bought Adam Smith’s Theory of Moral Sentiments (1759) and had left it unread on the bookshelf for 35 years! Meanwhile, the world kept going as it always does, doing what it did for several centuries before Adam Smith was alive and continued to do long after his death.

Monday, May 16, 2016

ADAM SMITH IN SUPPORT OF STATE REGULATIONS

“In a 1776 book entitled "An inquiry into the nature and the causes of the wealth of Nations," Adam Smith propounded a theory of the invisible hand, where he used the term 'invisible hand' as a metaphor to delineate the unintended social benefits resulting from individual actions.

Comment

Whether individual actions produce “unintended social benefits” must be judged on a case by case basis. Clearly, Smith did not believe, and nor did he write, that all “individual actions” led to unintended social benefits. That would be an absurd assertion, so why does Andrew Heanngam Pamei attribute the idea to Adam Smith”?

In the specific case Smith mentioned in Wealth of Nations - that of a merchant who preferred to invest locally rather than send his capital abroad - because the unintended consequence of his action added to domestic investment, this could be considered as a social benefit. Of course, as always, whether an action leads to an unintended benefit depends a great deal on what happens next. The risk-averse merchant could also engage in anti-competitive actions, such as restricting inward investment - protectionism for example - which reduced competition and raised domestic prices. Hardly, said Smith, a social benefit.

“He contended for the individuals to work for their self-interest as every individual is a rational being, this would ultimately result into the overall societal development. And so he gives the idea of free market without any regulations i.e, the idea of Laissez Faire state, which subsumes individualism and liberalism. But there are certain preconditions for the capitalist model to achieve the desired objectives; i.e, man has to be rational in every decision which is not practical, and there can be many instances of market failure such as asymmetry of information among economic agents, presence of public goods, externalities in production, consumption and also uncertainty.”

Comment

Smith did not write that “every individual is a rational being”. That assertion came later in the 19th century (Smith died in 1790) and is the bedrock on which much modern mathematical analysis is based.

Neither did Smith mention “laissez-faire”, ever! “Laissez faire” ideas originated in the late 17th century among merchants in dispute with the state authorities, in pursuit of their own interests and not those of the consumers of their products. Laissez-faire remains a one-sided approach to policies favouring “merchants and manufacturers’ interests”, not those of the labourers and consumers.

Smith favoured “natural liberty” for all, not one-sided laissez-faire for owners only. He did not support nor advocate the “idea of free market without any regulations i.e, the idea of Laissez Faire state”. Andrew Pamei repeats modern misinterpretations - in the above examples, grossly minsintepretating Adam Smith! Smith, in fact, suggested several specific regulatory actions a government could, indeed should, introduce by law.

Andrew Pamei corrects himself in the last few sentences. Good! But as Adam Smith never claimed otherwise, why does Andrew Pamei repeat modern misinterpretations in his above examples?

WHAT CAUSED THE GREAT ENRICHMENT?

He is vice president for policy at the Niskanen Center, overseeing the Center’s research and publications. He was the founding editor of Cato Unbound and has been a program director at the Mercatus Center and the Institute for Humane Studies. Twitter: @willwilkinson

Will Wilkinson: "Rethinking Libertarianism: Social Justice and The Great Enrichment”

"The great strange fact of human history is how it came to be that a good chunk of our species, after more than 100,000 years of scraping by, suddenly got rather wildly rich. Deirdre McCloskey, the eminent economic historian and social theorist, calls it the “Great Enrichment.”

The suddenness of the Great Enrichment is nuts. Graphs like this one actually conceal how nuts it is. Imagine a linear horizontal axis that is nothing but a flat line hovering above zero for, like, a mile. And then, about a second ago in geological time, wham! And here you are, probably wearing pants, reading about it on a glowing screen. Nuts is what it is.

Accounting for the Great Enrichment is the deepest puzzle of the social sciences. Some think it was all just a matter of figuring out how to exploit natural resources, or some combination of enslavement, exploitation, and colonial plunder, or maybe it was just geographic and genetic good luck. None of that really explains it.

Joel Mokyr says it was the development of science and technology. Douglass North and his followers, such as Daron Acemoglu and James Robinson, say it was a matter of stumbling into the right political and economic “institutions”—of getting the “rules of the game” right. Acemoglu and Robinson say institutions need to be “inclusive” rather than “extractive.” They become more inclusive when ruling elites take a little pressure off the boot they’ve got on people’s backs (which they do mainly when cornered by effective collective action from below) and allow economic and political rights to expand. Deirdre McCloskey says the Great Enrichment came about from a shift in beliefs and moral norms that finally lent dignity and esteem to the commercial classes, their “bourgeois” virtues, and the tasks of trade and betterment. This revaluation of values was the advent of what has come to be known as “liberalism.”

Each of these views is part of the truth. The debate is mainly a matter of how beliefs and norms, institutions and incentives, scientific knowledge and technical innovation all fit together. Which are the causes and which are the effects? There’s no way to adequately summarize the involuted nuance of the debate. But it’s not wrong to sum it up bluntly like this: humans rather suddenly got immensely better at cooperating and now a lot of us are really rich.”

Comment

Thus the opening of an interesting essay that wrestles with the clash of ideas prevalent in modern societies and remain unresolved.

I urge readers to consult it, knowing that many will be tempted to turn away from continuing when they encounter views with which they disagree profoundly, from whichever political perspective to which they adhere. Keep reading and note that readers with a different perspective to your stances will likewise be made uncomfortable by Will Wilkinson’s stances on your particular shibboleths.

I was pleased to see that Wilkinson’s reference to early bargaining among humans was an important humanising force at the root of the conscious discovery of both benefits and disbenefits to the distribution of natures resouces. I consider that the significance of Adam Smith’s reference in Wealth of Nations (WN I.ii.pp.25-2) to the discovery of the human propensity to exchange, presented as ‘truck, bartering and exchange’, has been understated by many readers - and erroneously lampooned by some recent critics, among them some unthinking modern ‘anarchists’ (Dr David Graeber for example).

“In 2009, Itravelled to Geneva, Switzerland, to follow up on the mysterious case of the Pune-based stud farm owner, Hasan Ali Khan. Khan was accused of stashing a mindboggling $8 billion or `50,000 crore in the Swiss bank, UBS. He had allegedly taken the help of a Kolkata-based businessman, Kashi Nath Tapuria, to squirrel away these funds. Who was Khan and why should he have so much money in a faraway tax haven? Quite clearly, these two shadowy figures were the benamis of someone bigger and more powerful – whose invisible hand guided the trajectory of the probe. Here are the reasons why I think this is the case.”

Thursday, May 05, 2016

QUICK BITS No. 3

Adam Smith wrote: "[Every individual] intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it."

In game theory selfish and rational individuals, pursuing their own interest. The extend their choices promote the society, can show up the efficiency of Adam Smith's invisible hand.

So, I would say that game theory can provide an indication of invisible hand's span and efficiency. I wouldn't put the subject as game theory against invisible hand's theory.

Comment

Nikos Makrymanolaki equates self-interest with personal moral selfishness. Hence, a thirsty traveller in a desert is selfish if she finds an oasis with water and drinks the water (or indeed eats food in normal life). Methinks such thinking is defective. In Game Theory players make choices, given the limited options open to them and the choices open to the other players. A purely selfish choice by a player may end the game for both of them.

Moreover, in Smith’s example, the player who seeks the security for her capital, who invests locally, adds to her wellbeing and also adds to domestic investment, which also benefits others by adding to “domestic employment and output”. Who is the loser? Who is a victim of her actions guided by her self interest (not by her selfishness?).

Smith's use of the metaphor from Wealth of Nations of an invisible hand had nothing to do with selfishness.

QUICK BITS no 2

AUDREY LEYNAUD posts on Daily Tar Heel HERE about UNC graduate James Adam writing about his experience working in a waffle house, somewhat disullusioned about his experiences in finance.

Interesting but for this quote from the Daily Tar Heel:

“If you go back to the origin of capitalism, with Adam Smith and the French economist Jean-Baptiste Say, both saw capitalism as a means of increasing living standards for the people,” he said.

Comment:Neither Adam Smith nor J. B. Say knew about ‘capitalism’: the word was first used in English in 1854 by Thackeray in the ‘Newcomes’ ((Oxford English Dictionary). Smith refered to ‘commerce’ not ‘capitalism’.

QUICK BITS no 1

AUDREY LEYNAUD posts on Daily Tar HeelHERE about UNC graduate James Adam writing about his experience working in a waffle house, somewhat disullusioned about his experiences in finance.

Interesting but for this quote from the Daily Tar Heel:

“If you go back to the origin of capitalism, with Adam Smith and the French economist Jean-Baptiste Say, both saw capitalism as a means of increasing living standards for the people,” he said.

Comment:

Neither Adam Smith nor Say knew about ‘capitalism’: the word was first used in English in 1854 by Thackeray in the ‘Newcomes’ ((Oxford English Dictionary). Smith refered to ‘commerce’ not ‘capitalism’.